The Subprime Court

By now everyone knows the new Supreme Court tilts to the right. Bush’s nominees Justice Alito and Chief Justice Roberts lead a conservative five-justice bloc, where reproductive health rights have been cut back and the President’s Office of Faith-Based Initiatives keeps getting public money.

What’s less known is the court’s newly expanded function as an institution of corporate power. Since Bush’s appointments, the court has begun hearing far more business cases and, in case after case, has "pushed the law in a direction favored by business," as the Wall Street Journal reports. For example, the U.S. Chamber of Commerce, America’s most powerful business lobby, took a position on 15 cases before the court in 2007 and its side won in all but 2.

That makes sense. Roberts previously represented and filed briefs on behalf of the Chamber and other business organizations like the National Association of Manufacturers and other corporate clients. The Financial Times refers to Roberts and Alito as "pretty much the dream candidates of economic conservatism," calling Justice Roberts "a white-shoe corporate lawyer" and noting "Justice Alito often sided with employers in his prior life as a judge."

The result is reviewed in Business Week, which quotes Robin Conrad of the Chamber of Commerce’s litigation arm: "The judicial branch offers an alternative forum where business can seek changes it has failed to win from other branches of government. In the 1990s, the chamber and other business groups made this a vital part of their tort reform strategy, pouring money into local judicial campaigns to reshape state supreme courts… [now] the approach is playing out on a national level." But "tort reform"—where barriers are raised to discourage suing companies—is only one part of what business expects from the court, in what will probably be decades of "business friendly" decisions.

Consider banking regulation, which is making a comeback these days with even the Federal Reserve Chair coming out in favor. Our highest court recently ruled that national bank subsidiaries that extend mortgage loans, a major part of our current straits, can’t be regulated by state governments. Impressive, since mortgages and home equity loans were among the financial assets that were repackaged into forms that ended up bringing down the banks. The subprime legacy doesn’t seem to faze the court.

Additionally, the court ruled almost unanimously that banks, being "regulated" by the Securities and Exchange Commission, cannot be sued by investors—making them "generally immune from antitrust liability" as the International Herald Tribune describes, allowing our "too big to fail" banks to get even bigger.

The Supremes also decided that citizens have no right to legally challenge the tax breaks used by most of the U.S. states to "lure investment and jobs away from competing localities," as the Financial Times reports. "Forty-six of the 50 states offer some form of investment tax credit. Big companies, many of them carmakers, get billions of dollars each year from states and cities in what critics call an ‘escalating arms race’ of tax incentives." This is a big deal, since this type of tax concession is how firms drive the "race to the bottom" among states and countries—either you lower my taxes or I’ll build my plant somewhere that does. So, for the Roberts Court, if the states want to oversee banks’ shady mortgage-issuing, no dice. But if they’re cutting taxes on Toyota so they’ll condescend to build a plant, no problem.

Business involvement in elections has been a recurring subject for the court. A 2007 ruling overturned a significant part of the McCain-Feingold campaign finance law, finding that corporations, unions, and interest groups can run "issue ads" immediately before elections. The intention of the law had been to prevent a pre-election flood of campaign advertising, thinly disguised as advocating for a political issue, paid for by companies and other groups. The law was restricted to the period just prior to elections or primaries and only to ads which were funded by corporations, unions, or other groups from their own general treasuries—a very limited restriction on how companies could use their massive financial advantages in an election environment.

The court set a very high standard for these sham "issue ads" to be found in violation of McCain-Feingold. The ads have to expressly urge a position on a candidate, or be subject to "no reasonable interpretation other than as an appeal to vote for or against a specific candidate," to be found illegal. In other words, they won’t be, as described by Richard Hasen, law professor at Loyola Law School, Los Angeles, in a paper on the court’s new ad-friendly stance. Noting that the "burden of proof is on the government to prove the advertisement is not subject to exemption" and that the decision expressly forbids considering the context of the election in interpreting the ad, he finds that most campaign ads of the issue-oriented variety "will comfortably fall on the permitted side of the line." In fact, "Very few ads broadcast close to an election" directly push for a candidate, but "almost always mention a legislative issue, even if they are also attacking a candidate." Clearly, the 2008 flood of corporate and other campaign ads in battleground states owes a lot to our highest court.

Now the court seems ready to overturn or restrict even this weakened limitation on corporate campaign influence. Since the law could extend to any political speech, as long as it advocates a candidate and was paid for with general corporate or group funds, it’s conceivable that books or signs could be banned, if paid for by firms. This has led to the conservative wing of the court posturing as defenders of the First Amendment. The poor corporations are being slightly limited in their massive dollar advantage over unions and other groups, so their political speech rights must be defended. Of course, the court also found that students can be censored and punished by schools for mocking school policy, in the well-known "Bong Hits 4 Jesus" case.

Another overturned McCain-Feingold provision, the "Millionaire Rule," raised the ceiling on individual campaign contributions for candidates facing a self-financed opponent whose vast resources tilt the playing field in their favor. The court found that this was unfair for imposing more restrictions on one party in an election, even though this doesn’t address the advantage held by rich candidates who can self-finance. In fact, the rule itself was a response to a previous Supreme Court ruling overturning restrictions on wealthy candidates using their own cash to gain office. An outside observer might call this a clear argument for publicly-funded elections.

Turning to elected judges, the Supreme Court ruled "an elected judge may rule on a case where one party spent $3 million to help get him elected," the Wall Street Journal reports. The question was whether this violates the constitutional rights of due process and impartial trials. Notably, conservative Justice Scalia held that due process was not violated because the judge’s conflict of interest was "vague." Three million bucks sounds pretty specific to me, but I’m no lawyer.

However, I am an economist and I’ll tell you that you can thank the court for some higher consumer goods prices as well. By five to four the court overturned a 1911 Supreme Court ruling outlawing "minimum-price agreements," where a manufacturer requires that retailers not mark down the prices of its products. The business press describes the corporate rationale for legalizing this practice: "minimum resale price agreements, although raising prices within brands, could be good for consumers as price competition between brands would be stimulated…the loss of competition on price would be more than made up for by the way a price floor would allow retailers to compete on service rather than on price alone." The Wall Street Journal describes them as "a means to enhance a brand’s image and for retailers to make enough profit on their merchandise to provide better customer service," but they "have run into legal trouble in the past when federal officials found they resulted in higher prices for consumers."

This is essentially what economists call "price fixing," where firms work together to increase markups on products and thus the price paid by consumers. In spite of the companies’ argument that the MPAs will encourage price competition between brands, the Journal observes that similar video games Guitar Hero World Tour and Rock Band 2 are being sold at the same mandatory retail price—$189. The court’s opinion here is that when firms increase prices, the extra money will go into improving the product or customer service. Of course, it’s just possible that the higher markups will fatten the manufacturer’s profitability instead.

The Roberts Court’s trademark has been its limitation of damages in corporate lawsuits and its moves to prevent firms from being taken to court at all. The court reduced the punitive damage settlement against Exxon for the 1989 Valdez oil spill by 80 percent, from $2.5 billion to $500 million. It also reversed a jury decision against cigarette manufacturer Philip Morris, which awarded $79 million to the widow of an Oregon smoker, on the grounds that the jury might have based that number on a desire to punish the corporation for harming other smokers (juries are silly that way). The court now seems eager to further reduce the limited extent to which companies can be held liable through lawsuits for costs they impose on others, or "externalize."

The press describes the court as "closing the courtroom door," preventing lawsuits against corporations, very often from the firms’ own investors. The court has found that class action lawsuits alleging fraud must be brought to federal courts where they’re effectively barred; that investors can’t sue Wall Street banks over their losses from IPO agreements during the 1990s stock mania; and they face tighter standards for bringing suit for antitrust conspiracy. This series of decisions greatly reduced corporations’ liability to investor suits, leading the Chamber’s Conrad to declare the Roberts Court in 2007 "our best Supreme Court ever."

The Roberts Court is essentially insulating corporations from suits from their owners and customers. Such suits are often the only recourse when firms "externalize" their costs in loose regulatory environments. Closing off the possibility of redress for victims of corporate destruction will save firms billions of dollars, hence Conrad’s grateful attitude. Interestingly, while many of these business cases have been won by the court’s five-justice conservative bloc, on issues of limiting court damages the court has been more unanimous—even the "liberal" justices would see firms insulated from accountability for their behavior.

There have been some cracks in the corporate lock on the court. One interesting example is the court’s treatment of employee discrimination cases. Businesses, of course, would like to see these restricted. In the first such case the court ruled against plaintiff Lilly Ledbetter, a supervisor at a Goodyear plant who had learned that her employer had paid every male in a similar position about $1,000 more per month. The court threw out her case because she failed to meet a strict 180-day deadline in filing suit. This tightened statute of limitations meant that very few such cases could be filed.

After this became a prominent national issue, the court changed its tune. As the press describes, Ledbetter led to "loud protests…. Since then, the court has consistently sided with employees who have alleged discrimination and ruled…to allow lawsuits to go forward."

One such development suggesting incomplete commercial dominance of the Roberts Court is its recent decision on drug labeling. After having found that manufacturers of medical devices are shielded from lawsuits by their government-approved safety labels, the court found drug manufacturers aren’t and that suits against them could go forward. This reversal has led some observers to conclude that its reputation as a business plaything was premature and that "something of a reevaluation of the court is underway." But it should first be noted that Bush’s conservative appointees dissented from this decision, along with Justice Scalia. So what happened to the other conservatives, Thomas and Kennedy?

The answer lies in the doctrine of federal "preemption," where government regulation prevents state lawsuits. Preemption has only recently been extended to drugs from medical devices, mainly in a late policy of the Bush administration. Apparently that took obedience to corporate power too far for a few conservatives. Unfortunately, after the series of business rulings reviewed here, it’s a drop in the water. Still, it’s heartening that the court seems to have backed off in the face of the outcry after the Ledbetter decision, which suggests that an aroused public can still exert pressure.

Sure, the Supreme Court’s an inherently conservative institution, sympathetic to the wealthy and powerful from whose ranks the Justices have historically been drawn. But the escalation of the number of business cases on the docket suggests that corporate America has tightened its grip. As the Economist noted, Bush’s only lasting success in his "domestic legacy" probably lies in "shifting the Supreme Court significantly to the right." Over the coming decades, it will take a more thoughtful, organized, and active version of the response to the Ledbetter case to make the court even approach the desires of U.S. citizens. Popular organization and education is the only way to drag the Roberts Court kicking and screaming into the 21st century.

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Rob Larson is an assistant professor of economics at Ivy Tech Community College in Bloomington, Indiana.